Obama and an Aussie small cap

Richard Hemming

In light of President Barack Obama's victory last week, this column would like to quickly reflect on two of his legacies from his first four years in office, and how they relate to an Australian small cap named Orbital, whose product literally flies under the radar.

Obama legacy 1: Don't give up on hoping for better times

Hope is particularly important when you are an Orbital shareholder. Many a stockbroker (your columnist included) has lost a client base supporting the Orbital Engine “fuel injection technology, which improves engineering efficiency to no end – a must have in an environment of tightening emission standards for vehicles”. Or so I told them, in 1995.

Orbital's shares were trading at $24 in the late-1980s, a time when many believe that the United States' power was at its zenith. Now, even after a recent spike, Orbital's stock is at 10 cents.

Times have been trying for Orbital, which has been barely profitable in the past decade due to an “engineering business, which was risky and in decline” in the words of Orbital's current chief Terry Stinson. Last financial year, on just over $22 million in sales it lost almost $3 million.

Stinson, like Obama is American (although not, to our knowledge, from Chicago). While Obama is trying to return the US back to its glory days, Stinson is trying to do the same with Orbital.

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He took the reins at Orbital, having previously worked at Siemens, just prior to 2009 when Obama first rode hope to the Whitehouse.

Obama legacy 2: Drones

Rarely has a foreign policy been so reliant on inanimate objects to win battles. Obama has authorised 283 drone strikes in Pakistan, six times more than the number during president George W. Bush's eight years in office, according to Peter Bergen, CNN's national security analyst.

In figures again provided by Bergen, the number of estimated deaths from the Obama administration's drone strikes is four-times what it was under the Bush administration – somewhere between 1494 and 2618.

These drones, or “unmanned aerial surveillance” technology as Stinson calls them, could well be the Orbital shareholders' salvation.

In late May, Orbital announced a $4.7 million contract with AAI Unmanned Aircraft Systems to supply it with engines. This was after AAI had won military contracts from the US navy and Special Operations Command to provide its “Small Unmanned Aircraft Systems (SUAS)”.

Orbital reckons its technology can increase the range of these drones on a typical mission by 40 per cent over current technology, or it can allow AAI to increase their carrying capacity.

AAI is owned by a giant US defence conglomerate Textron, which also makes golf carts. Its market cap is $US6.8 billion ($6.5 billion) and Stinson envisages further lucrative contracts, but he won't be specific (probably because it's classified).

The sky is literally the limit for Orbital's drones, which are now in full production in Perth, according to Stinson. He waxes lyrical about them being good for Australia's law enforcement and border patrol, and much more efficient than its navy.

“They cover a lot of space for not a lot of cost and they use infrared. The ocean is cold, but whether people are in the boat or in the water they are warm.”

Yes We Can

Unlike Obama, there isn't quite the ground swell of support for Orbital, whose market cap is $10 million. There are still believers, though. One is Adrian DiMattina of Melbourne-based specialist small cap manager SG Hiscock, whose fund owns 9.8 per cent, and isn't backwards when speaking about the company:

“This is a company with a global customer base and it's going for the price of a home in the eastern suburbs of Sydney.”

The morality of drones is questionable, but Orbital's shareholders won't be thinking about such issues if it can bag another big contract.

Click here to access the fortnightly newsletter Under the Radar Report: Small Caps, edited by Richard Hemming.